CHAPTER 27 SOLUTIONS
END OF CHAPTER QUESTIONS COVERED IN LECTURE – NOT
7, 8, 9, 10, 11, 14, 15, 16, 17, 25, 26, 27, AND 29.
7. In large part, the differences between the gift and estate taxes were eliminated in 1976
(see answers to parts c., d., and e. below), but some differences were retained (see
answers to parts a. and b. below). However, the Tax Relief Reconciliation Act of 2001 reinstated
one significant difference (see answer to part d. below).
The Federal Gift and Estate Taxes 27-5
a. The annual exclusion is allowed only for gift tax purposes.
b. Pre-1977 taxable gifts are considered under the gift tax but not the estate tax. This
is so since the unified transfer tax system was not instituted until 1977. To be progressive
in nature, the gift tax has always been cumulative in its operation.
c. Post-1976 taxable gifts are taken into account in the application of both the Federal
gift and estate taxes.
d. The Tax Relief Reconciliation Act of 2001 froze the gift tax credit at $345,800 and
by increasing the credit periodically, began a phase-out of the estate tax.
e. The tax rates are the same for both taxes.
f. The generation-skipping transfer tax applies to both gift and estate tax situations.
p. 27-36, Figures 27-1, 27-2, Tables 27-1, 27-2, and Appendix A-26
8. a. Because Kelley never paid a gift tax, her gifts over the years must have coincided
with the scheduled increases in the unified transfer tax credit. In this manner, she
utilized the $1 million total exemption equivalent currently available for gift tax purposes.
b. Upon Kelley’s death in 2007, she is allowed an exemption equivalent of $2 million
for estate tax purposes. Since $1 million already has been used to cover prior
taxable gifts, this leaves a balance of $1 million now available. Consequently,
$1 million of her taxable estate can ‘‘bypass’’ the estate tax and pass to her heirs.
Keep in mind that the term ‘‘bypass’’ has the same meaning as using the exemption